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Glossary of Life Insurance Terms

Beneficiary: The individual, individuals, or organizations designated by the policy owner to receive the benefit when the insured dies when the policy is in force.

Cash surrender value: The amount of money you can "sell" your policy back to the issuing company for, in exchange for cash. If you surrender the policy back to the company, you may be liable for capital gains taxes, though, if your cash value is greater than your contributions over the years.

Cross-purchase agreement: An agreement among shareholders, partners, or members of an LLC to purchase the business interest of a deceased partner or fellow-owner from that person's heirs. Most heirs would rather have cash and these agreements, frequently funded with life insurance, protect surviving owners from the disruption a new owner with no real interest in the business can cause.

Death benefit: The benefit payable to the policy beneficiary - usually tax-free - when the insured dies when the policy is in force.

Dividend: A payment a mutual insurance company makes to its policy holders - either in cash, in credits to the policy cash value, or to discounts against the premium. These premiums are considered to be non-taxable returns of premium by the IRS, except when paid in cash, which is part of the appeal of permanent life insurance. Cash values accrue tax-free within the policy, provided the policy is properly structured not to become a modified endowment contract, or MEC.

Group Term Life: Term life insurance offered to a group or association membership as an employee benefit or perk. Premiums on the first $50,000 of term life insurance death benefit are generally deductible to the employer, provided the employer pays the premiums and does not name itself the beneficiary on these policies. Additional premiums paid on the employee's behalf are taxable as income to the employee.

Illustration: A written projection of your policy's costs, death benefit, cash values and premiums. Your agent should provide you with a written illustration upon policy delivery.

Insurable interest: A legitimate economic interest in the life of another person. You cannot generally take out a life insurance policy on someone unless you would be harmed if that person were to die. You are presumed to have an insurable interest in yourself, a spouse, your child and your parents, however.

Key Person Life Insurance: A life insurance company takes out a policy on a key employee, executive, rainmaker, client, or vendor. This policy may be indicated if the company would experience substantial economic harm from the unexpected death of the key individual.

No-Lapse Guarantee: A contractual guarantee from the insurance company that promises that regardless of what happens to cash value, the policy will not lapse, as long as you pay scheduled premiums on time, and do not withdraw money from the policy's cash value.

Policy loans: A loan you take out against the cash surrender value of a permanent life insurance policy. Loans are tax-free. They do accrue interest. You can pay the loan back, or let interest accumulate. Eventually, the life insurance company will subtract any outstanding balances from an eventual death benefit payout.

Rider: An additional, optional feature or guarantee added on top of the base policy. These riders can be free, or available for additional premium. Examples include an accidental death benefit rider or a waiver of premium rider in case of disability.

Secondary Beneficiary: A beneficiary who receives the death benefit if the first beneficiary has died or disclaims the death benefit.

Underwriting: The process of determining whether an applicant qualifies for coverage and how much. Underwriting can be medical or financial or both. If you have health issues you may not be approved for life insurance coverage, or you may have to pay additional premium.

Universal Life Insurance: A kind of permanent life insurance policy. These policies feature a permanent death benefit, but premiums are flexible. Cash value buildup varies with the type of policy selected. Cash value in a variable universal life policy can go up and down based on the movements of the subaccounts the policy holder selects.

Waiver of Premium: An optional rider that requires companies to pay premiums on an insured's behalf if the insured becomes disabled. This helps protect policy holders against losing life insurance benefits just when they get sick or hurt.

Whole life insurance: A type of insurance policy that features a guaranteed level death benefit for life, guaranteed level premiums for life, a conservative, guaranteed crediting rating on cash value within the policy. Policies from mutual companies may also pay a dividend - returning a portion of the company's profits, if any, to the policy holder.

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